Summation will make you think ... by Auren Hoffman ... since 1997 ...

Nov 19, 2012

A fast friend heuristic to determine who to marry, hire, or even invest in

The “pretty girl” is the object of desire, rare and easy to spot. For our purposes, the “pretty girl” (gender neutral here) can be a potential mate, a company where you may want to work, someone you may want to hire, or an entrepreneur in whose start-up you may want to invest.

But to weed out the great from the good takes rigorous due diligence, so, here is a simple friend heuristic that could make it easier to do the sorting.

Finding a soul mate

When looking for a mate, everyone wants that “pretty girl.” For some, that means good looks, for others it might mean wealth, and still for others, an Ivy League education. Most people looking for a mate are influenced by one overriding and particular trait over the rest. In fact, even if the other traits are negative, a person will likely go on at least one date with someone if that key trait is positive. And so, perhaps fairly or unfairly, these Pretty Girls have opportunities not available to the rest waiting behind the red velvet ropes.

But as experience dictates, not all “pretty girls” are created equal. Some beautiful people are ugly on the inside. Some rich people are vapid. Some erudites are emotionally stunted and Ivy League schools have their share of the lazy and entitled.

Uncovering those deal-breaking faults takes time and effort.

We are hardwired for friendships. Given the importance we place and energy we expend tracking and communicating with a particular set of close friends, the social web we weave says quite a bit about us as a potential mate (or hire, candidate, etc.).

So here is a fast and frugal “friend heuristic” to determine whom you might want to marry:

If all their close friends are also “pretty”, birds of a feather and all that, you don’t want to marry them. They are likely too worried about their image and trying to be “cool.”

If all their close friends are not “pretty,” you don’t want to marry them. They have a “Queen Bee” complex and need to be the center of attention.

However, if their friend group is more diverse on that particular dimension, they’re a much better bet.

In my unscientific survey, this is true whether the overriding trait you’re searching for is looks, wealth, education, or some other quality.

And that trait, like all pretty girls, is usually easy to spot. But, of course, you don’t want to hire someone that only has that trait and miss major flaws.

Just like dating, take a look at their close friends. If all, or none, of their friends are “pretty,” there is probably something wrong with this person. If they live in San Francisco and all their friends go to Burning Man, they might be living in a bubble. If they live in SF and none of their friends go to Burning Man, they might also be living in a bubble. Having diverse set of friends leads to out-of-the-box thinking and an ability to branch out of one's comfort zone.

This is also a good exercise when investing in a company

When meeting the founders of a company, it is really hard to assess if they are a non-linear thinkers. Can they go against the grain?

Again, here, the “friend heuristic” works well. If all their friends are of the same race, political party, religious group, shop at the same grocery store, read the same books, have the same phone, listen to the same music, laugh at the same jokes -- then stay away. These people are likely to be followers, not leaders. They might be smart, accomplished, and hard-working ... but they might be so worried about being popular that they are unlikely to do something which requires major risk.

Given a choice, most people will make friends with people who most closely resemble themselves. A recent study by researchers Angela Bahns, Kate Pickett, and Christian Crandall shows that students at large universities have less diverse friends than people at smaller colleges. The authors reason “when opportunity abounds, people are free to pursue more narrow selection criteria [in forming friendships], but when fewer choices are available, they must find satisfaction using broader criteria.”

This strengthens the efficacy of the “friend heuristic.” It takes a contrarian to have a diverse set of friends.

Charles Darwin, a contrarian of his time, apparently practiced a form of the “friend heuristic.” He said: “a man’s friendships are one of the best measures of his worth.”

Oct 01, 2012

The old adage that “it’s not what you know but who you know”
is so entrenched that we don’t question the premise. Undoubtedly, who you know
has been important throughout history, whether in the trade networks of ancient
Greece, or in the dense web of high tech companies in Silicon Valley. A good
network is especially important when capital is scarce, information hoarded,
and when finding the appropriate contacts is difficult. For most of history,
knowing the right people was crucial if you wanted cash and cache.

In a Harvard Business Review article entitled “How
to Build Your Network,” Brian Uzzi and Shannon Dunlap contend that “Networks
determine which ideas become breakthroughs, which new drugs are prescribed,
which farmers cultivate pest-resistant crops and which R&D engineers make the
most high-impact discoveries.” They cite the 1998 work of University of
Pennsylvania sociologist Randall Collins who showed that breakthroughs from
icons such as Freud, Picasso, Watson, Crick, and
Pythagoras were the
consequence of a particular type of personalnetwork that prompted exceptional
individual creativity.

But with tools such as LinkedIn and Facebook, the ability to network is becoming
more democratized. If before it was difficult to ferret out the perfect
contact, today finding a right marine biologist in New Zealand or the genetic
researcher in Norway is as easy as a Google search. And social media has made
it even easier to connect with that person. As for capital, today it is relatively plentiful and accessible, and it is much
easier than ever to get access to people who have it (accessing capital can be
as easy as sending an email).

Information, too, has been democratized. It used to be that if you wanted to
get access to cutting-edge ideas in technology, you needed an invitation to an
exclusive conference like TED, or to attend a university like MIT. Today, TED
lectures and MIT courses are offered free online. The only barrier to most of
the world’s best information is knowing English. Because it is so
accessible, public information offers less competitive advantage than
previously.

Given our hyper-connected world, could it be that “who you know,” while still
important, matters a little less than in the past? Could it be that “what you
know” carries more weight?
My intuition is that “what you know” has now crossed the line to be more
important ... and possibly even MUCH MORE important ... than “who you know.”
Like Kurt Vonnegut said in Breakfast for Champions; “new knowledge is
the most valuable commodity on earth. The more truth we have to work with, the
richer we become.”

In today’s world, if you know something really compelling, you will be sought
out ... and sought out directly. Dorothy will follow the World Wide Web
equivalent of the Yellow Brick Road to come to you. In the past, the people
with connections were gatekeepers who controlled access to the elite circle and
got paid handsomely for that. Today, people that invent interesting things (the
true What-You-Know people) will reap many more rewards than the brokers who
make introductions.

Even professions such as banking and law are becoming more specialized.
The lawyer that understands the intricate tax implications of U.S.-Brazil
joint ventures is now much more valuable than the generalist lawyer that
introduces you to that person.

I’m not saying your network isn’t important – it will just
be less important than it has been in the past.
Even the Wizard of Oz was looking to network: just before he leaves the
Emerald City he tells Dorothy that he is off “to confer, converse and otherwise
hobnob with my brother wizards.”

In the new world of abundant capital, easy access to information and people
with knowledge, it’s what you know
rather than who you know.

Jul 18, 2012

It started out fine. I moved the car out of my garage and into the street, turned it off real quick, tried to turn it on and wham ... everything died. I wasn't sure what happened (car is only two years old) but I have not driven this car for over 2 months.

I was blocking traffic, causing mayhem. I couldn't start the car and couldn't even put it in neutral to push it. I was stuck.

I called a tow truck. They said they would be at my location within 30 minutes. I waited ... but I did not want to wait 30 more minutes (or potentially longer) and I had no visibilitiy into when the tow truck would actually arrive

I probably just need a battery jump ... that would likely do the trick. So I tried to flag down passing cars to give me a jump. But this is San Francisco and they probably thought I was trying to ask them for spare change ... so they all sped away.

So I did what any Internet-phile would do, I used the interwebs...

I ordered a car on Uber. Sure enough, there was a car driven by Monty a few blocks away and it arrived in 2 minutes. Yes, 2 minutes.

He manuevered his Lincoln Town Car next to my little hybrid and we hooked up the jumper cables and whammo -- my car was back in business!

First thing I did was jump out of the car and I gave Monty a great big hug. Not sure what possessed me (I'm not normally a hugger of strongers) but Monty was just so helpful.

Unfortunately, there was no way to pay him on Uber (the official trip was 0.00 miles) but I gave him 5 stars and $40 in cash (and the hug). I definitely owe Uber CEO Travis Kalanick a drink to make up for the lost Uber commission.

Jul 10, 2012

Rob Reid wrote a great new great new book (came out today but I read it a few months back) called Year Zero. my recommendation: Read this book.

Here is the five-star review I wrote on Amazon:

If you grew up loving Hitchhikers' Guide to the Galaxy, you'll love this book. If you are not from planet earth or your brain was somehow rewired to dislike Douglas Adams, you'll probably not like this book.

Two additional things I liked about this book:1. It is also a wonderfully written overview of how the music industry works.2. It has powerful male and female characters and is a good read for all genders (my wife, not someone who generally likes science fiction, loved this book as well)

The theme of this book is that aliens have been listening to our rock music for 30 years and then, one day, the music industry finds out about it and sends the aliens a bill for more money then there is in the galaxy. hilarity ensues. highly recommend this book.

May 04, 2012

The best conversations are about non-obvious ideas. Whether it be a dinner party, an interview, catching up with an old friend, family outing, etc. We learn more, engage our mind, and are more drawn into conversations about ideas.

Unfortunately, most conversations are about something other than ideas. They might be about others we know (gossip), others we don’t know (celebrities/sports), ourselves, logistics, business talk, etc. And once a conversation moves, it often takes its own path (and often it is a banal and uninteresting path).

I have found that the best way to reinvigorate a conversation is to lob in a TPQ – a Thought Provoking Question.

The goal of the TPQ is to get everyone engaged and thinking about something bigger than the group. Depending on the intellectual firepower of the discussants, your goal should be to come out of the discussion with a new take on a problem, issue, etc.

The best TPQs are ones where there is no obvious answer and, extra bonus, where you don’t feel you know the answer.

Four examples Thought Provoking Questions (TPQs) that you can try:

1. To get people talking and really thinking, one of my favorite questions is:When is it OK to lie?This is a very interesting and difficult question. It attacks the core of who we are and people will get to discussing omission, what is the best way to love another (white lie or tell the truth), and more.

2. Peter Thiel’s favorite TPQ is:What is something you believe that most people you know thinks is crazy?This is a great question (especially for an interview or a dinner party) because it gets people thinking about how to think for themselves. Encouraging non-conformity is really important in a TPQ.

3. If you are in a really nerdy group of engineers (which is often the group I am a part of), a question I like is:When will computers beat humans at soccer?I like this question because it often starts people thinking and takes the conversation to a new level.

4. If you are with entrepreneurs, you can borrow a question my friend Dan Rosenthal recently asked at a dinner party:Do you think Steve Jobs would have been as successful if he was a nice person?There is obviously no right answer and it gets people talking about management styles, creativity, passion, and being good to others.

Apr 14, 2012

Before we begin, I know this post is going to be controversial and that many will disagree. I’d love your comments and feedback.

There are a lot of bad bosses in this world. I don’t know the percentage of bosses that are “bad,” but it should be close to zero and it is not. First, let me define a bad boss. A bad boss isn’t someone that is imperfect or has flaws (we all do). A bad boss is someone that is not growing their subordinates and does not have the respect from most of their subordinates.

In a perfect world, bad bosses shouldn’t exist. It is a market failure. Most people think bad bosses exist because they suck-up to their supervisors. That’s not entirely true. The main reason bad bosses exist is because their subordinates tolerate them.

While “toleration” is often a good thing, we should be intolerant of bad bosses. They are destructive on organizations, on people’s happiness, and they can sap creativity and productivity.

If you have a bad boss, it is your duty to make sure that he or she is either no longer bad or no longer a boss. This is because most people who are not a subordinate will rarely be able to judge if someone is a bad boss. As the subordinate, it is your job to make the change: for the good of the organization and the good of society.

Bad bosses shouldn’t exist.

If you have a bad boss, you should follow these three steps:

Try to make them a better boss. Work with the boss to make him/her better. Give them feedback and try to change them. This is hard and most bad bosses are bad because they cannot improve (and likely do not take feedback well).

Get them demoted, reallocated, or fired. Many bad bosses are bad because they are in over their head. They got promoted to a role they should not have and they don’t feel comfortable there. You should let a bad boss know they are in the wrong position and you are going to work within the organization to change their role.

Quit. If you cannot change them or move them, your only remaining option is to quit. That doesn’t mean you need to quit the company entirely (it could mean you get yourself transferred to a new boss), but you should never work for a bad boss (it will stifle your development). And if everyone who works for a bad boss leaves, the bad boss would eventually get replaced.

Mar 21, 2012

It has been common wisdom for the last 50 years that if you are a long-term investor, your best return will be in stocks. Almost every financial advisor will tell a 30-year-old to put upwards of 90% of their portfolio in stocks.

Most people above median wealth have a substantial allocation of their liquid portfolio in stocks. Some people pick stocks (Apple, GE, Wal-Mart, etc.) and some invest in managed mutual funds (Fidelity), while others invest in index funds (the S&P 500 from Vanguard).

Stocks are less than 10% of my portfolio. This is a long article (read time is going to be at least 12 minutes) but I implore you to read it in full.

“Never invest in a business you cannot understand.”- Warren Buffett

That’s great advice from the Sage of Omaha. But we should take it a step further: Never invest in a security you do not understand.

So the question is: do you actually understand the stock market?

Prices of stocks seem to be a mystery to even the most experienced investor. There are often market swings of over 1% per day.

Supply and demand.

Most investors argue that fundamentals (like expected earnings) drive price. That doesn’t seem to be a complete explanation as we have had a market which has basically remained flat since the late 1990s.

The best explanation, beyond “fundamentals,” for long-term market movements: supply and demand. In this case, “supply” is the number of total stocks for sale and “demand” is the total dollars looking to buy these securities.

The key factor here is the demand. While supply (investible stocks) does change, its change is very small relative to the demand (amount of money looking to invest in the market). So as more money goes into the market, the market goes up. If money is coming out of the market, then the market goes down. It is basically that simple.

To properly be a long-term stock market investor you need to read the mind of the public. You should only put your money in the stock market if you think everyone else will keep money there. So to inform your portfolio allocation, we want to figure out if money is going to flow into the market or leave the market over the next thirty years.

Let’s examine the six key factors why money might be leaving the U.S. stock market:

Retirement Savings

Globalization

Technology companies

Taxes

Interest Rates

You're over-correlated to the stock market

1. Retirement Savings

One of the biggest investors in public stocks is people through their retirement funds (401ks) or through pension funds. One of the big reasons the market has been flat over the last 15 years (and not collapsed), is because so much retirement money has come into the market. Most of that money is held by people who are close to retiring and will likely be coming out of the market, albeit slowly, over the next 30 years.

Asset allocation would suggest that people should allocate away from equities as they get closer to retirement. I don’t have data on this, but I would guess that most boomers still have over 50% of their portfolio (excluding real estate) in equities (even after the 2000 and 2008 crashes). This is way too high. Since many of these people are counting on the retirement income to live, they might flee from the volatility of the stock market and move to safer investments.

Robert Arnott, chairman of Research Affilitates (and an asset manager at PIMCO), recently said: “the ratio of retirees to active workers in the U.S. will balloon. As retirees sell stocks and then bonds to support themselves, there will be fewer younger investors to buy those securities, keeping a lid on prices.”

2. Globalization

Globalization has been a huge boom to the market over the last 30 years. Today it is easy for anyone in the world to buy stocks in America, and America has historically been the safest place to put your money. Because of this, we’ve seen a massive influx of capital from all over the world, and especially from oil rich nations that need to invest their profits in an historically safe environment.

But globalization is a two-way street. While the U.S. stock market has been a huge beneficiary of globalization over the last 30 years, it could be its biggest loser in the next 30. Today, it is becoming much easier for Western investors to invest in high-growth countries like Brazil, China, South Africa, and India. And while I personally don’t invest in emerging markets funds (save that for another article), millions of investors will be drawn to the potential returns of these high-growth countries.

Globalization also means increased competition from old entrants as well as start-ups. New companies are disrupting old but profitable businesses – sometimes by giving away core products for free. We see that time and time again, the top companies are getting their lunch handed to them by new entrants. In every major field (including software, computers, energy, retail, media, defense, and pharma), established players (those that had the highest market maps) are getting squeezed by the little guy. All this means that the average time a company will be a member of the S&P 500 should drop significantly.

All indications is as the world gets more interconnected, it is also getting much more volatile. We should see many more bubbles and more ups and downs as capital can zip around the world in nanoseconds. This volatility could be the enemy of the buy-and-hold index investor who is at the whim of much more sophisticated global banks.

3. Technology companies

In the 80s, 90s, and 2000s, tech companies drove a lot of the market growth. Microsoft and Dell went public while they still were extremely fast-growing companies and public market investors were able to ride the growth upwards. Even recent IPOs like Google, Salesforce, and Amazon went public early enough so that investors were able to participate in substantial gains as the companies grew. Remember that Amazon went public in 1997 but it wasn’t profitable until 2001.

Today, because of the abundance of private equity capital and regulations like Sarbanes-Oxley, tech companies are going public much later in their development. Companies like LinkedIn and Facebook were able to delay their IPO by 2-3 years because they had access to late-stage private equity. And while biotech firms are still going public before they are profitable, we will likely see more and more companies waiting to list. In today’s world, public market investors do not get as much of the benefit of the company rise (most of that benefit will be going to private equity funds). So one of the biggest growth drivers of the market, hot tech companies, is being substantially reduced.

4. Taxes

Stocks have been a very favorable investment because gains held over a year are taxed at the lower cap-gains rates and the taxable event only happens when you sell a stock (and many people can do tax arbitrage by selling their losers).

Long term capital gains taxes in the U.S. are near an all-time low. In the 1990s and 2000s, we saw a substantial decrease in the rate of capital gains taxes while taxes on ordinary income have remained basically flat on upper-earners.

One prediction we can confidently make: cap gains taxes are not going to go down further in the next 30 years (even though many of us would like them to). More than likely, we will see a rise in taxes on cap gains – especially on the upper-earners who control most of the money in the market. When this happens, stock gains will look less favorable and it will be another reason for people to rebalance their portfolio away from public stocks.

5. Interest rates

Can interest rates be near zero forever?

Clearly the answer is “no.” At some point, the U.S. federal government will need to inflate itself out of its massive debt. In any scenario, interest rates can’t get any lower. When interest rates rise, future earnings of companies will suffer (and if that is not already factored into the price, stocks will fall).

6. You are already over-correlated to the stock market

If you are reading this article (and you have gotten this far), you are probably part of the population whose job is over-correlated with the stock market. If you are in technology, finance, real estate, law, consulting, or in most of the other top-earning professions, then your future income and job security is probably very tied to the stock market.

If you do invest in the stock market, you need to have the ability to ride it out for the long haul (ride the ups and downs). If you are in a profession that is over-correlated with the stock market, you’ll have extra income (you’ll want to buy) mainly when the market is really high and you’ll need income (you’ll want to sell) mainly when the market is down. You won’t be in a position to take advantage of the long-term market trends (and likely that others in the market will take advantage of you).

All this is not to say that you can’t make money in the stock market.

Some professional traders will be incredibly successful. But the traditional “buy and hold” strategy seems like it is going be “hold and lose.” When the stock market fails or remains flat over the next 30 years, our entire society’s savings strategy will need to be recalibrated.You should only put your money in the stock market if you think everyone else will keep money there. If you think some people are going to start fleeing the market, then you should make sure you flee first.

But I want to make out-sized returns

The best way to get massive returns is to invest in yourself. Start a business, join a fast-growing company, or become the newest singing sensation. If you believe in yourself and your talents, focus on things you can control rather than things, like the stock market, that you can’t.

While Auren Hoffman is CEO of Rapleaf and a Venture Partner at Founders Fund, his opinions are his own. Follow him on Twitter (@auren) and Facebook (aurenh).

Special thanks to Stephen Dodson, Jeremy Lizt, Travis May, Patrick McKenna, Ken Sawyer, and Michael Solana for their willingness to debate me on this issue.

Mar 06, 2012

Rule: Everything you sell, including yourself, should deliver at least twice the price in value to the buyer.

We’re all selling things every day. It is important that the buyers of our products (including those employing us) are very satisfied with what they purchased. If buyers feel like they got at least a 2x return, they will be happy and keep coming back for more. If they get less than 2x, they’ll be skeptical of what they bought and start reconsidering their options.

Let’s say I sell you a piece of software for $10,000. After using it for a year, it is very important for me that you feel you got at least $20,000 in value. If not, you are going to be upset. In business, all people need to feel like they are getting a 100% return on their capital.

Similarly, let’s say you hire me for $80,000/year. It is important that you feel you are getting at least $160,000 in value for that money. If you are getting less, then my job is in jeopardy.

This goes into price. People inherently feel they get more value out of things they pay a higher price for. We all know that. But getting a 2x return on a $1000 meal is much harder than getting a 2x return on a $10 meal at In-N-Out. So it is important you keep your prices low enough to ensure the buyer gets a great return.

Of course, if a buyer is getting a 10x return, then your prices are way too low. In that case, you should raise your prices or ask for a raise.

Summation: Everything you sell, including yourself, should deliver at least twice the price in value to the buyer.